Recent Trade & Tariff Perspectives

May 11, 2022 | Alyson Brinkman Senior Compliance Manager

Is Duty Drawback Right for You?

The duty drawback program is an often-overlooked opportunity for companies who import and export goods out of the United States. Drawback can be an effective tool to recover up to 99% of certain duties, taxes and fees of goods that are exported or destroyed after importation. It is also a complex and time-consuming process that companies must navigate through when determining if it is right for their business.

What is duty drawback?

Duty drawback is a program with U.S. Customs and Border Protection (CBP) that allows for the refund of up to 99% of certain customs duties, taxes and fees that were paid at time of importation, and where the goods have been later exported or destroyed either unused or manufactured into another good.

The duty drawback program was first established in 1789 by the Continental Congress and was initially created to generate jobs, encourage manufacturing and the exportation of goods. Since its inception, the duty drawback program has always evolved. Additional amendments were added throughout its 233 year history and expanded to cover more commodities and opportunities for more companies to take advantage of the program.

The most recent changes to duty drawback came with the Trade Facilitation and Trade Enforcement Act (TFTEA) that was enacted in February 2018. TFTEA drawback regulations were modified to require all drawback claims to be filed electronically via the Automated Commercial Environment (ACE). Paper drawback claims are no longer accepted by CBP. It also worked to simplify the standards around the use of substitution, and to strengthen the compliance requirements around record retention and liability for false claims.

Who can benefit from drawback?

Drawback can be used for one-off situations where duties were paid on goods, but the goods were exported or destroyed for various reasons—as well as for companies who regularly import goods and export them to other countries. The key driver in drawback is the exportation (or destruction) of the imported goods.

Companies who benefit from drawback are often found in these industry sectors:

Agricultural products
Alcoholic beverages and tobacco
Automotive and aviation products
Consumer goods
Metals and alloys
Petroleum and derivatives
Packing materials
Pharmaceuticals and medical equipment
Textiles, apparel, and fabric

What are the most common types of drawback?

There are several different types of drawback that are authorized by CBP for companies to attempt to recover duties depending on commodity, but they can be grouped together into three major categories.

Rejected merchandise drawback: Imported merchandise that was either defective, non-conforming to specifications, or shipped without consent at the time of importation may be eligible for rejected merchandise drawback. Importers can recover the duties paid on the rejected merchandise if the goods are exported or destroyed under CBP supervision.
Unused merchandise: Drawback is available on imported goods that were exported or destroyed without being used in the United States.
Manufacturing drawback: Imported goods used to manufacture a new and different article, that is subsequently exported or destroyed. The claimant must apply for a drawback ruling with CBP that notifies CBP of the manufacturing process used from the time of import to manufacturing through export.

There are two types of manufacturing rulings. CBP has issued general manufacturing rulings for specific commodities that a company can apply for that were designed for drawback. If a company is unable to produce under one of the prescribed rulings without any variation, the company must apply for a specific manufacturing drawback ruling at the time of application for review and approval by CBP.

With both unused and manufacturing drawback types, companies can use two types of methods:

Direct identification: Imported merchandise that is identifiable by a serial number, SKU number, part or lot number, or an approved accounting method.
Substitution: Merchandise that is classified at the same eight-digit HTSUS number as the designated imported goods. There are additional requirements that will need to be evaluated before companies can use substitution as a drawback method.

What duties, taxes, and fees are eligible for drawback—and which ones are not?

In effect, 99% of certain duties, taxes, and fees may be recuperated if a claimant is eligible for duty drawback. Duties eligible for drawback include, but are not limited to:

All ordinary customs duties—including Section 301 duties for Chinese origin goods
Internal revenue taxes
Marking duties
Merchandise processing fees (MPF)
Harbor maintenance fees (HMF)

Duties not eligible for drawback include, but are not limited to:

Antidumping and countervailing duties
Section 232 duties imposed on aluminum and steel products
Over-quota agricultural products

How much could you potentially get back in drawback?

To estimate your potential drawback eligibility, multiply the estimated duty paid by the percentage of sales that are exported annually, and then multiply that by 99%. For example, if a company pays five million dollars in duty every year on the imported goods, but 25% of those goods are ultimately manufactured into another commodity and exported, the company could potentially recoup $1,237,500 in duties, taxes, and fees from drawback.

Annual duty paid: $5,000,000
Annual export sales: 25%
$5,000,000 x 25% = $1,250,000
$1,250,000 x 99% = $1,237,500 in potential drawback

How can you participate in drawback?

Companies must apply for drawback privileges with CBP and provide additional details or waivers depending on the types of drawback that they will be using. It is best to work with an experienced customs broker, trade attorney, or trade partner when navigating the drawback process. CBP has consistently advised that drawback is a privilege, not a right, and applications are not always guaranteed or approved.

Companies can also request accelerated payment when submitting their application for drawback privileges. Accelerated payment of drawback claims allows companies to receive their refunds prior to liquidation, allowing them to receive their funds if approved by CBP. A company must also have a drawback bond that would cover the estimated number of duties, taxes, and fees to be claimed during that period.

Are there any drawbacks to drawback?

Drawback can have a significant revenue savings for companies looking to save duties, but it is also a very complex program that requires an exacting recordkeeping and compliance program. It is a time-consuming process, and it can take years before a company receives their first refund check.

Companies must maintain all records related to the importation of the goods—as well as detailed invoices, proof of duties paid, inventory records, manufacturing records, and proof of exportation. There are also very strict timeframes that companies will need to adhere to when identifying eligible merchandise and filing claims.

TFTEA also increased liabilities regarding false or fraudulent drawback claims, and companies who are found to be submitting false or fraudulent claims could be subject to both criminal and civil penalties. CBP does perform audits on drawback to ensure accuracy and eligibility of the claims filed.

How can C.H. Robinson help?

Drawback is one of the most complex programs CBP has available, but companies could reap the benefits of drawback if they are eligible. C.H. Robinson offers a variety of services to explore potential drawback opportunities for your company. Connect with one of our trade policy experts to learn more.

Resources

Our information is compiled from a number of sources that to the best of our knowledge are accurate and correct. It is always the intent of our company to present accurate information. C.H. Robinson accepts no liability or responsibility for the information published herein.

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